With mortgage interest rates changing and considering whether to fix your mortgage interest rate, you might also be wondering if an ‘interest only’ mortgage might be a good option.
An ‘interest only’ mortgage can provide temporary relief, but it’s important to understand the downside before making any decision.
With an ‘interest only’ mortgage, your repayments only cover the interest on your mortgage, not the principal, being the original amount you borrowed.
So this significantly reduces your monthly repayments in the short term, and for those struggling with trying to reduce their outgoings, it can offer some relief. Thus, freeing up cash flow to be used for other necessary outgoings, or paying down higher-interest debts.
However, there are long-term considerations to seriously consider.
As the principal is not being repaid, the total amount of your loan does not decrease. So, you could end up with paying more in interest over the life of the loan. Then at the end of the ‘interest only’ term, your repayments would jump significantly as you will still need to pay off the principal.
The gamble is therefore that if your financial situation has not improved by then, this could create future financial strain.
Not all lenders offer ‘interest only’ mortgages, so it is important to check if this option is available to you.
Having a conversation with a mortgage adviser can help determine whether an ‘interest only’ loan fits your financial needs and long term goals.
Whilst an ‘interest only’ mortgage may ease financial pressure now; it is important to view this type of mortgage as a short term solution. This is because as it may be used to ease financial pressure now, you will eventually need to start paying down the principal.
Having a plan in place for when the ‘interest only’ period ends is essential to avoiding future financial payment shocks.
In summary, an ‘interest only’ mortgage can offer immediate relief by lowering your payments, however it comes with potential long term costs.
As mortgage advisers here at iLender, we can help you carefully make an informed decision by weighing up the pros and cons, considering your financial situation and future plans.
For tailored advice, or just a chat about this, pick up the phone and call
0800 LENDER (536337) or email to [email protected]
